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Do you require a Financial Plan? - Outside View by PersonalFN

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Do you require a Financial Plan?
Jan 3, 2014

We all have aspirations in life; be it buying a dream home, a car, travel abroad for leisure with family, children's education, their marriage, and even living a comfortable life once retired. But these aspirations in order to translate into reality require us to put finances in order and invest wisely in accordance to a well-drawn financial plan.

You see, a well-drawn financial plan enables you to construct a road map to achieve the aforementioned financial goals and unforeseen needs that may arise in one's lifetime. It ensures that you are well equipped to deal with dynamically changing circumstances such as inflation and changing lifestyles. In the absence of an appropriate financial plan, you might not be well-equipped to accomplish what you have dreamt of achieving and might also be under-prepared to deal with contingencies.

For your convenience, we have listed below the scenarios where financial planning might come to your aid. These points will help you determine whether you need a financial plan for yourself or not.

A financial plan is required if:

  1. If you don't realise where and how your income is spent every month, then you definitely need to plan your finances better. In today's era of consumerism and with the constantly rising inflation, many people fail to understand how their monthly salaries get extinguished, leaving them with very little or absolutely nothing to save. Impulsive buying and lack of budgeting for expenses, runs many into problems in the long run, with not having saved for taking care of children's future needs or even one's retirement. Thus not keeping track of your expenses and being carefree leads you to bid a goodbye to your long term financial goals, while may achieve all the fancies of life in the short run.

  2. Secondly, when you have various liabilities and just don't know how to get out of the debt trap, it's time you put your personal finances in order. In today's world, each of us want a higher lifestyle than what we presently enjoy. A lifestyle that gives us more comfort and advantages. In order to meet these needs, wants and wishes of our families, we land up increasing our loans and borrowings through credit cards, overdraft facilities or personal loans. In most cases, these easy finance options result in damaging the financial health of people leading them into a financial mess. A financial plan will not only help you to come out of this mess, but will also enable you to manage your cash flows better in order to achieve your other financial goals.

  3. If your investments are scattered and you are yourself unsure about where you have invested, then it's time your portfolio in order. Many often indulge in investing in a haphazard manner without conducting a proper need based analysis or undertaking sufficient research on financial products. In most of the cases, tips from friends and families go about forming a portfolio, which may eventually leave an unsuitable portfolio for you. Also investing in an ad-hoc manner results in scattered investments which gets difficult to manage / track. The investment portfolios of such investors are extremely strewn with duplicating schemes and investments which do not provide any advantage of diversification. Such investment portfolios need to be consolidated and re-aligned so as to meet your financial needs.

  4. You are not sure if you have made the right investments. Many people invest in the equity asset class through shares or mutual funds. However more often than not, as mentioned earlier, such investments are done on recommendations from friends and relatives and without taking into consideration one's financial goals and risk appetite. In most of the cases these unplanned and non-researched investments result in loss of the investors' money. Hence it is extremely important that you invest only after considerable research has been undertaken on any investment proposition. Constructing a financial plan will enable you or your financial planner to review your portfolio (both equity and debt) and restructure the same (if required) to provide you with the best possible outcomes.

  5. If you have multiple life insurance policies and don't know which policies to keep. Sometimes people land up taking multiple policies such as Endowment, Money Back, ULIPs, Pension Plans etc. due to the incomplete knowledge or mis-selling of products through agents. Many a times, these policies do not solve the purpose of the insured and only result in filling the pockets of the agent who sold you that policy. Some policies which promise you a life cover plus returns (market linked) may fail to do both. More often than not, these policies provide a very low cover and also low returns due to the number of charges involved. A financial planner can help you understand which insurance policy suits you the best and which ones are best avoided.

  6. If you don't know how much insurance cover is required. In case of unfortunate circumstances, the right amount of insurance can be a financial boon to you or your family members. While life insurance will ensure that your family members are able to maintain the same standard of living even in your absence, the right amount of health insurance cover can avoid burning a huge hole in your savings that mishaps or unforeseen tragic events could have created. However, many people do not understand how much life and medical cover they should take. A financial planner will take into account your income, expenses and goals amongst host of other aspects to determine the optimal amount of cover both - your life and health insurance needs.

  7. If your portfolio is skewed towards any particular asset class. Most people consider equity as the best investment option especially during a stock market rally. However it is never wise to put all eggs in the same basket. It is vital for you to understand that not all assets move in the same direction at the same time. If equities are witnessing a bear market, it is unlikely that other asset classes such as gold, debt instruments and real estate will also be witnessing a down-turn at the same time or vice-versa. Hence it is best to invest in more than one type of instrument to improve your chances of achieving your long-term goals with minimal turbulence. However you must understand asset allocation need not be the same for all individuals as asset allocation is a subjective concept which differs from person to person on the basis of his / her risk appetite and risk tolerance. Hence a suitable asset allocation for you can be devised through a financial plan which acts as a shield to protect your wealth during uncertain economic conditions and market volatility.

  8. If you want to plan for financial goals such as buying your dream home, a car, a vacation abroad, child's education their marriage needs and your retirement amongst host of others; prudent financial planning can come to your recourse. Through experience we can say that many vie for all the aforementioned goals, but lack of prudent financial planning and / or procrastinate on executing the financial plan drawn, which in turn hinders accomplishment of financial goals set. So, it is imperative that a prudent financial plan is made, and is vigilantly and religiously followed so as to make your dreams come true.

  9. If you don't have a habit of investing systematically and regularly. You see, to create wealth in the long-term, regular investing along with discipline and determination is the key. Even a child needs discipline and regular monitoring to achieve his goal of being a good student. Hence, as a grown up individual you definitely need to invest regularly and wisely to meet your financial goals. Investing small amounts regularly will also prove to be light on your wallet and reduce the burden of defraying a huge amount in one shot from your bank account. Hence saving and regular investing can enable you to meet all your financial goals in life in a comfortable manner. However it might be difficult for you to determine the amount that you would need to invest regularly to meet all your goals. A financial planner can help you establish the requisite corpus for meeting your financial goals through planned investments in the right investment avenues.

  10. Lastly, if you don't have road map of how to achieve your dreams a prudently drawn financial plan can be your blue print to meet all your financial goals while empowering to deal with contingencies as well. Hence financial planning is for those who have unclear ideas or plans of how they would achieve their dreams and wishes in life.
PersonalFN is of the view that if any of the above 3 points are applicable to you then you definitely need a financial plan. Please recognise that, achieving financial nirvana isn't as difficult as it is often made out to be. To get there, all one needs to do is, construct a viable financial plan and be determined about achieving it. However, as many of you might not have the time and expertise to plan and execute your own financial plan, it would be prudent to invest in the advice of an experienced financial planner who might help you to plan and manage your finances better.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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